Poor Analysis, Reporting of Urban Property Bubbles

As this article
The Japanese bubble: Alarming parallels with
U.S. - International Herald Tribune illustrates - the
standard of analysis and reporting of the current global
credit contraction, precipitated by the bursting of specific
asset bubbles, is generally of an exceptionally poor
standard. In this case, the IHT excels itself in exclaiming
in the headline “alarming parallels with US’– then
proceeds to inform us through the body of the article, that
there are no parallels.

This follows hard on the heals of
the recent “floundering effort” by US Businessweek in
another irresponsible headline grabber Housing Meltdown - which missed the real
market drivers completely and concluded by informing readers
that the grossly distorted and inflated Australian housing
market is “the good”, Spain “the bad” and that the
British housing market had a “silver lining”!

The
British housing market is - in structural terms - (with new
residential stock average build size being just 76 square
metres), the most damaged of the Anglo world – although
California in its race to the bottom, is doing its best to
emulate the British disaster. Both Britain and California
currently have appalling build rates at or below 3 per
thousand population – barely replacement.

The reality is
that normal open urban markets housing should move between a
Median Multiple (median house price divided by median gross
annual household income) from the floor multiple of 2.0
through the swing multiple of 2.5 and top out at a ceiling
multiple of 3.0, through the building cycle.

Ideally –
this swing through the building cycle should be more
moderate in moving between a floor multiple of about 2.3 to
a ceiling multiple of 2.7 – to avoid excessive
construction market swings, adversely impacting the
residential construction sectors long term pricing and
productivity performance.

This is achieved by allowing new housing to be
built on the urban fringes – unimpeded, without further
onerous levies and charges inflating pricing. In effect –
the urban fringes act as a supply vent or inflation vent
(there is no other way), by providing “acceptable”(in
terms of size and quality depending on local market
conditions and particularly incomes) new starter housing at
the swing multiple of around 2.5, as clearly illustrated in
the recent Demographia Sydney - Dallas Fort Worth Fringe Starter
Housing Comparative Study.

Dallas Fort Worth is an
open market (something Sydney clearly is not), capable of
providing new starter homes on the fringes for around
$140,000 comprising $30,000 for the lot and $110,000 for the
actual house construction. The important development ratios
of 20% lot – 80% house construction are maintained around
the fringes of open affordable urban markets.

This is
something the closed urban markets –such as those along
the coasts of North America, the United Kingdom, Ireland,
New Zealand and Australia and elsewhere can not achieve,
because through artificial regulatory impediments, land
supply is starved and land prices inflated.

Since the
Local and State Governments were responsible for the
creation of these artificial scarcities and inflated pricing
of land around the fringes - they are never slow “sharing
in the booty” by extracting as much of these “artificial
fringe land scarcity values” for themselves. Orwellian
language comes in to play here – as these are described as
betterment and developer levies. Better for whom? Developer
levies? In reality of course, they are imposed on the new
home purchaser.

These “artificial fringe land scarcity
values” can easily hoist the fringe land by one million
dollars –two million dollars – three million dollars a
hectare and beyond. Governments engaged in what really
should be termed “extortion”generally aim to capture at
least half of these artificial scarcity values for
themselves. The Australian governments are particularly
zealous in this regard – often owning the land and
succeeding in “milking” most of these artificial
scarcity values for themselves.

So obviously these
“government milked markets” before long inflate well
outside the ceiling multiple of 3,0 and households within
these dysfunctional markets are soon forced to pay 4, 5, 6,
7. 8, 9, 10 and beyond their annual household incomes to
house themselves. The “most milked” in this years
Demographia Survey are the households of Los Angeles at an
astronomical 11.5 times their median gross household
income.

The reality is – that for people to access
ownership within these dysfunctional markets –
dysfunctional mortgage products need to be designed to meet
their needs. The normal purchasing and financing practices
of buying houses at no more than three times annual
household income, with deposits of 10 and 20% and mortgage
debt loads of around two and a half times annual household
income are quickly abandoned.

The “market culture”
soon turns from a disciplined and responsible one - in to an
irresponsible and hugely damaging speculative frenzy –
something all participating convince themselves will never
end. It could be said that property inflation is make
believe wealth creation (fools gold) for the
ignorant.

Never ending urban property inflation
(supposedly) makes the equity ( a word that very soon fades
from view) and debt financing risk free to the ignorant and
gullible as illustrated in Herb Greenberg » Blog Archive » Straight
Talk on the Mortgage Mess from an Insider . When these
bubbles pop (as they always do) – it would appear that Las
Vegas is where some of the victims gather to “lick their
wounds” as outlined in Creators of Credit Crisis Revel in Las Vegas
- New York Times . The New York Times article is wrong
in suggesting that the finance sector was the “creator”
of these bubbles. Governments - both State and Local are the
creators of these artificial scarcities – understandably
triggering the speculative frenzies.

The finance sector
simply and understandably (what other option did they have?)
– with the willing support of their customers - assisted
in providing the fuel to inflate these government created
scarcities.

It appears that the havoc of asset bubbles has
to be learnt by experience with every generation and that it
is impossible to teach people about them out of textbooks.
No doubt the Las Vegas finance sector conference attendees
called in to Washington first, pleading for government
welfare, prior to heading out to Las Vegas.

It would
appear that the Banks and other lending institutions may
become very significant property owners in California,
Florida and other dysfunctional and inflated urban markets
throughout North America and beyond.

Keep the inflation
profits through the upside of the bubble – but “bank”
the losses through the downside – seems to be the order of
the day.

The easy California “bail out laws” will no
doubt assist people to migrate from the dysfunctional to the
normal open markets such as Texas. This migration has in any
event been speeding up as these bubbles inflated, as set out
by these Demographia Studies ( here , here and here ) based on US Census data.

As the
saying goes “demographics is destiny”.

In this regard
– it would appear that the State of Texas (with the other
normal United States markets) has an enormous competitive
advantage as outlined within Texas Homeowners Hold Winning Hand, Says
Real Estate Center reporting on a speech by Dr James
Gaines of the Real Estate Center of Texas A & M University,
following the recent release of their Report

It is to be hoped that the
business and property media refrain from “selling” to
the public the myth that property inflation is growth –
and instead – “report reality” by focusing their
attention on the structural issues and drivers of urban
markets.

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